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    A “New” World Bank

    Apr 18 • Developing Economies, Economic History, Financial Markets, International Trade and Finance • 473 Views

    What if you made a huge amount of money available for projects in Northern Africa and the Middle East? Let’s say you successfully expanded airport capacity in Cairo or raised incomes in rural Tunisian communities? The World Bank can claim these successes.

    And yet, they are saying that their development mission has to involve more. In an NPR/Marketplace interview, World Bank president Robert Zoellick said the World Bank’s challenge was to “connect citizen involvement with the development challenge.”

    Adding specifics during this past weekend’s World Bank spring meetings, Mr. Zoellick named soaring food prices and joblessness in Northern Africa and the Middle East as primary concerns. Also, citing the “youth bulge,” that would require 40 million new jobs during the next 10 years, he expressed support for short-term job creation.

    The Economic Lesson

    Not really a bank, the World Bank is still a financial intermediary. Borrowing in world financial markets, it raises money. Then, it loans its funds to developing nations. Technically called the International Bank for Reconstruction and Development (IBRD), it was created in 1944.

    You might want to look here to see a fascinating graph of the different national currencies that fund their projects.

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    Chinese Marriage Markets

    Apr 17 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic History, Gender Issues, Households, Thinking Economically • 530 Views

    A typical young Chinese woman is looking for a husband who owns a home. Probably, she will find one because China’s single child policy and tendency toward male preference have resulted in massive gender imbalance. With so many more marriageable men than women, the husband-hunting female wields a lot of power.

    Telling us more about the results of a survey of 32,000 people from 2 Chinese research groups, the NY Times explained that the real estate boom in China has divided the young male population into the haves and have-nots. The majority of women surveyed would select men with “deeds.” Yes, Chinese women care about good morals and personality, but not as much as finance. As a result, 24 million men might remain unmarried during the next decade.

    The Economic Lesson

    Nobel prize winning economist Gary Becker tells us that marriage is about a lot more than love. Instead, we can best understand marriage by looking at utility functions and marriage markets.

    People marry because they expect to, “raise their utility level above what it would be were they to remain single.” (The Essence of Becker, p. 273) Looking for their best mate, they compete in marriage markets that have demand and supply curves. To see Dr. Becker’s descriptive and quantitative explanations, you might want to look at The Essence of Becker, pp. 273-328.

    What marginal utility might marriage provide to newlyweds?

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    Coupon Economics

    Apr 16 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Thinking Economically • 558 Views

    When Starbucks raised its prices during the beginning of 2010, it lowered the price of a tall regular to $1.70. But, if you wanted a splash of foam, a shot of espresso, or a touch of flavor, the addition could be expensive. For a triple grande soy vanilla latte, you would have paid a whopping $6.25.

    Their goal, I suspect was to attract coffee lovers who would spend a little and those who would spend a lot. For a basic cup of coffee, the price would be low. However, those who were willing and able to pay more would also be satisfied. In that way, Starbucks could retain a dual clientele.

    NPR’s Planet Money explains how Groupon takes advantage of the same idea. People willing to expend the time and energy looking for coupons pay less. But businesses still can take advantage of the group who, ignoring the coupons, are willing to pay more. Again, the business owner can benefit. She does not have to offer lower prices to everyone.

    The Economic Lesson

    Starbucks and Groupon are engaging in what economists call price discrimination. The perfect example is airlines. An airline knows, for example, that a business traveler might be willing and able to pay more than a vacationing student. Their task is figuring out how to charge the businessperson more. The answer? Give discounts to people who stay over a Saturday night. The price discrimination is not explicit and yet, business fliers are charged a higher price. 

    In economics textbooks, price discrimination is typically discussed in chapters on monopoly. A monopoly and a smaller firm with a unique good or service have pricing power that have enables them to target different customers with their prices and coupons. Movie theaters discriminate by charging senior citizens less.

    Do you think that colleges engage in price discrimination through financial aid?

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    Geography Matters

    Apr 15 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Households, Innovation, Macroeconomic Measurement • 460 Views

    According to Harvard economist Ed Glaeser, big US cities deserve our attention. Rather like a ripple, first, as ports, they attracted commerce. Commerce led to more affluence. The affluence brought more people. The people wanted better education. Better education generated more innovation. Combine people, income and education and they attract more people, income and education.

    Statistical proof? Los Angeles, New York, and Chicago represent almost 20 percent of the US GDP. The 2000 and 2010 Census Reports also tell us that the trend continues. People are gravitating toward the US West and East Coast.

    Such a wealth of data has immense significance for the budget debate. Among the many issues cited by Dr. Glaeser, he asks “whether attempts to bolster depressed areas are actually stopping people from migrating to areas where they might lead more productive, happier lives.” Your opinion?

    The Economic Lesson

    In a wonderful Teaching Company lecture, Macalester’s Dr. Timothy Taylor, explains why sub-Saharan African geography hindered their economic growth. Lacking port cities for international trade and rivers that connected to the interior, trade and development were constrained.

    Apply the same variables to the US and you can see how geography matters.


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    Baseball Salaries and Taxes

    Apr 14 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Labor • 457 Views

    There is a connection between baseball and President Obama’s budget proposals.

    Let’s start with USA Today’s baseball salary database. For 2011, at $32 million, NY Yankees’ 3rd baseman Alex Rodriguez earns the most; #2 is LA Angels’ outfielder Vernon Wells at $26,187,500 and #25 is Boston Red Sox pitcher John Lackey at $15,950,000. Much lower but still astronomical, the median salary for the NY Yankees is $2,100,000 and for the Boston Red Sox, $5,500,000.

    Historically, the numbers reflect a huge increase. In 1990, at the top were Milwaukee Brewers’ outfielder Robin Yount, and Minnesota Twins outfielder Kirby Puckett who were earning, respectively, $3,200,000 and $2,816,667.

    Comparing top baseball salaries, can we say that the rich are getting richer?

    This takes us to a University of Michigan blog from Professor Mark Perry. Disagreeing with UC Berkeley Professor Robert Reich that the rich are getting richer, Dr. Perry points out that today’s rich are different people from those with massive net worth 20 years ago. (You could look here for Dr. Reich’s position.)

    Because of “considerable” income mobility and rising incomes, there were meaningful shifts in the actual people in the different income brackets. Many households in lower income quintiles moved up while those in top groups fell. The “…share of income of the top 1 percent is higher than in prior years…” but it is a different group of households.

    So yes, the rich are richer. But, it is not the same people.

    How does this relate to the President Obama’s budget proposals? It relates to tax policy. Believing that incentives fuel economic growth, those who care most about income mobility tend to support tax cuts for the affluent.

    Your opinion?

    The Economic Lesson

    A very real issue that concerns economists is income distribution.  In the U.S., our national income comes from wages and salaries, rent, interest, dividends and profits from businesses that are not incorporated. To picture our income distribution, please think of a pie as the total national income and then individual slices as the proportion that different groups receive. That would mean that if total national income were $1,000 and a society had only five households (people living together), then if every household earned $200, distribution was equal. By contrast, if one family earned $800, then, because $200 remained for everyone else, there would be considerable inequality. Recently, the top quintile of households in the U.S. earned close to 50% of all income. This quintile approach for representing income distribution was developed by statistician Max Lorenz.

    *Original content has been minimally edited.

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